Guide
Use the trading allowance
When to use the £1,000 trading allowance versus claiming actual expenses. Includes eligibility rules, relief types, and the interaction with property allowance.
The trading allowance lets you earn up to £1,000 from self-employment or casual work without paying tax on it. But you need to decide whether to use this allowance or claim your actual expenses instead - you cannot do both.
What is the trading allowance?
The trading allowance is a £1,000 tax-free allowance for individuals with trading or miscellaneous income. It was introduced in April 2017 to simplify tax for people with small amounts of self-employment income.
Who can claim it?
The trading allowance is available to individuals only. You can claim it on income from self-employment, casual work, or miscellaneous sources like hiring out personal equipment. However, there are important restrictions.
Allowance or expenses - how to decide
This is the key decision. You must choose one method only for each tax year - you cannot claim the allowance and also deduct actual expenses.
Use the trading allowance when:
- Your actual business expenses are less than £1,000
- You want to keep things simple with minimal record-keeping
- Your gross income is £1,000 or less (you pay no tax either way)
Claim actual expenses when:
- Your expenses exceed £1,000
- You want to claim a trading loss (allowance cannot create a loss)
- You have significant capital allowances to claim
- Your business has substantial costs (stock, equipment, premises)
Example decision:
- Sarah earns £3,000 from freelance writing with £400 in expenses. Using the allowance gives her £2,000 taxable profit. Claiming expenses gives her £2,600 taxable profit. The allowance wins.
- Tom earns £3,000 from car boot sales with £1,500 in stock costs. Claiming expenses gives him £1,500 taxable profit. The allowance would give him £2,000 taxable. Expenses win.
Important restrictions
Before you decide to use the trading allowance, check these restrictions carefully.
Property allowance - a separate £1,000
If you have property income as well as trading income, there is good news. The property allowance is completely separate from the trading allowance.
Practical example
- You earn £800 from occasional freelance work (trading income)
- You earn £600 from renting out your parking space (property income)
- Both are under £1,000, so you can use both allowances
- Result - no tax to pay, no need to register for Self Assessment
When you do not need to register for Self Assessment
If your total trading income is £1,000 or less, you do not need to register for Self Assessment or tell HMRC about this income. The allowance automatically applies.
If you already file a Self Assessment return for other reasons (employment over £100,000, rental income, etc.), you can still use the trading allowance - just do not include the trading income if it is under £1,000, or elect partial relief if it exceeds £1,000.
National Insurance implications
If you use the trading allowance and your profits are reduced to nil, you will not owe Class 2 National Insurance. However, this could affect your state pension entitlement. You may want to pay voluntary Class 2 contributions (£3.50 per week in 2025/26) to protect your NI record.
Common mistakes to avoid
- Claiming both - You cannot use the allowance and claim expenses in the same tax year
- Ignoring restrictions - Any excluded income (from employer, spouse's employer, or connected partnership) disqualifies all your trading income from the allowance
- Forgetting capital allowances - If you use the trading allowance, you cannot claim capital allowances that year
- Multiple trades - The £1,000 allowance is shared across all your trades and miscellaneous income - not £1,000 per trade
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Calculate your gross trading income
Add up all income from self-employment and miscellaneous sources before any expenses.
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Calculate your actual expenses
Work out what you could deduct if claiming expenses - include allowable business costs and capital allowances.
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Compare the two methods
If expenses are less than £1,000, the allowance is better. If expenses exceed £1,000, claim them instead.
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Check for excluded income
If you receive any income from an employer, spouse's employer, or connected partnership, you cannot use the allowance at all.
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Decide on National Insurance
If using the allowance reduces profits to nil, consider voluntary Class 2 NI to protect your state pension.
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Apply the right relief
Under £1,000 = full relief (no return needed). Over £1,000 = elect partial relief when filing your return.
Tax-free allowances on property and trading income
No registration required
If your total self-employment income is £1,000 or less, you do not need to register for Self Assessment or report this income to HMRC.
Above threshold:
You must register for Self Assessment. You can then choose to use the trading allowance (reducing taxable profit by £1,000) or claim actual expenses.
Below threshold:
The trading allowance automatically covers your income. You have no tax to pay and no filing requirements for this income.
Trading allowance simplifies small-scale self-employment
The trading allowance is designed for sole traders with small amounts of self-employment income. It offers:
- No registration needed if income is under £1,000
- Simplified record-keeping - no need to track every receipt
- Flat deduction of £1,000 from income over £1,000
Comparison to other structures:
Limited companies cannot use the trading allowance. All company income and expenses must be properly recorded and reported through Corporation Tax returns.